John Burbank's hedge fund Passport Capital has filed a 13G with the SEC regarding shares of VIVUS (VVUS). Per the filing, Passport has disclosed a 8.5% ownership stake in VVUS with 8,552,929 shares.

This marks a 5% increase in the amount of shares owned since the end of the second quarter. The disclosure was filed due to portfolio activity on October 23rd.

Burbank's Thesis

We've heard rumblings that Burbank pitched VVUS at the Excellence in Investing conference in San Francisco the week prior and he believes it is a takeout candidate for big pharma. He's pointed to the company's obesity drug which he thinks will be very important. VVUS is said to represent around a 5% position for his fund.

Per Google Finance, VIVUS is "a biopharmaceutical company. The Company is engaged in the development and commercialization of therapeutic drugs for underserved markets, including obesity and related morbidities, such as sleep apnea and diabetes, and men's sexual health."

Dan Loeb's Third Point Offshore Fund is out with its latest exposure report for October and in it we see that they were up 2.6% for the month and are up 13.8% for the year.

Net Exposure Levels

Their equity exposure continues to rise as they are now net long 44.1%, an increase of 2.4% in net long exposure from the month prior. This looks to mainly be attributed to a reduction in their short exposure.

Their largest net long equity exposure continues to come from the technology sector (largely due to their Yahoo position) at 18.8% net long, followed by financials at 8.7% net long (mainly due to their AIG stake).

In credit, they were 26.7% net long at the end of October, down from 30.4% the month prior.

While Einhorn said that everyone "should have gold miners in their portfolio," it became clear he was less sanguine about other types of miners.

Iron Ore Supply/Demand

Einhorn started his presentation with the supply/demand dynamics of iron ore, noting that the infrastructure to get ore out of the ground is not cheap. He pointed out that it's cheaper for China to import ore from Australia than to dig it out of their own ground. Einhorn put up a chart showing iron ore prices from 1981-2011, peaking in the most recent year.

He went on to say that, if you give miners dollars, they dig holes. Higher prices attracted new supply and new players. It takes years to bring new supply online and he points out that there's a massive amount of supply about to hit the market.

He points out the Chinese investment binge as the driver of demand and notes that "something that's unsustainable persists... until it doesn't."

Einhorn then shifted to steel and noted that 2010 was the last year where steel saw double-digit demand growth. Supply now exceeds demand and they're in the midst of expansion. Big projects from 2010/2011 are coming online and the cost of stopping development is too high.

Einhorn argues that you can't contain the near-term situation since it's so expensive to halt projects. He feels that ore prices will head below 100/ton and could get as low as 80/ton. He even said that by 2014 it could go as low as the 60's. He opined that the iron ore situation could soon reflect the same situations that took place in polysilicon and LEDs.

Losers Singled Out By Einhorn

While Einhorn did not explicitly come out and say he was short any of these names, he put up a list of companies that will lose in this scenario:

Einhorn pointed out that X and MT have had an advantage because they own their ore supplies while their competition purchases ore in the markets. However, he says this competitive advantage erodes as the price of ore falls. The price of steel is also falling. These integrated steel companies are also facing competition from irrational Chinese steel mills that are willing to operate at a loss.

Bass mentioned that 90% of what he owns is in bonds (he has a ton of RMBS/subprime exposure). He joked that he's constantly a contrarian since many other speakers at the event expressed disdain for bonds (though to be fair, the others were negative on treasuries, not RMBS). He presented two ideas:

SuperMedia Debt

Before presenting his ideas, Bass noted that he pulled an 'audible' so this idea wasn't as in-depth. Bass points out that bankruptcy wiped out billions for the company and that the debt trades at 66 cents while equity has fallen into obscurity. He notes it's paying a 20% coupon and he thinks it's worth par in 2-3 years. He also pointed out how SuperMedia is trying to merge with fellow competitor DexOne.

Bass: Don't Own Japan

Bass said that there's 80-200 trillion in global debt. In 18 months Japan will structurally fall apart. "There's no chance at Japan repaying their debt."

He says psychology is important so look at anchoring bias. It's important to think about how others think about debt. Japan's debt to GDP is the worst in the world. Their debt is 25x their revenues. (David Einhorn was checking out Bass' slideshow).

Bass said there's 3 axioms that are actually false:

1. Positive current surplus, Japan not self-funding: This is flat false he says.

3. Retail investors will always support JGB's: Bass says Japan has a secular population decline.

We highlighted how in the past Bass has said that Japan would be selling more adult diapers than kids' ones and that's now the case. He also pointed out how the country is having "adult diaper fashion shows."

He also illustrated how Japan is trying to sell JGB's by showing advertisements of a schoolgirl band selling them and sumo wrestlers pitching JGBs.

Touching on the Softbank/Sprint deal since it was mentioned earlier in the panel by Lee Cooperman, Bass noted that Softbank paying 20 billion yen to buy broken telecom is Softbank exporting yen as investors are starting to flee the currency.

Bass says that Japan has one of the "largest structural fiscal deficits in the world." He doesn't know when exactly this collapse happens as this could go on for a few years? He notes the timing on this sort of thing is very hard to peg, but it will "absolutely happen."

He wrapped up talking about playing options on this scenario because if it happens, you get paid a ton. But in the mean time while you wait for it to happen, you only lose a little (we assume he's referring to price put options on Japanese JGBs, a trade he's talked about in the past). For more on this manager, we've also recently posted up Bass on Europe and how he's investing.

He says he's been optimistic the last three years, but is indifferent about markets now. He thinks we'll see slow growth and no recession (a 1 in 5 chance it happens). He points to the ECB succeeding in kicking the can down the road and China avoiding a hard landing as keys going forward.

Cooperman argued that the Fed has created an environment that's best for equities. Valuation is attractive when you compare it historically, though he later said that the valuation for the market now is "about right." He says investors have de-risked and many managers are running low exposure. Therefore, the max-pain trade is a move higher.

He believes that a peak in corporate profits in this business cycle is coming and that the fiscal cliff is a formidable issue for the market. While the economy is not great, we need to see a bigger dent in unemployment. We recently posted up another great presentation from Cooperman on hedge funds and life.

The Omega founder singled out high yield bonds as they yielded 20%+ in the crisis and now that yield is down to 6%. There's been a dramatic re-pricing in high yield, but not so much in equities. He again pointed out his disdain toward US government bonds, pointing out a contrarian signal that pensions have their third lowest equity exposure since 1997.

He thinks that investors will sell investments before the tax rates go up. As far as the election goes, he's also pro-Romney.

Cooperman's 3 Stock Picks

1. McMoran Exploration (MMR): He really loves the leadership of this company and thinks they're poised to do great things with their wells. Currently trading at just over $11.75, he thinks the stock is worth $33 and points to Chevron and Freeport McMoran also being involved in their projects.

2. Sprint Nextel (S): He talked about how Softbank is putting $8 billion into the company and thinks the stub is worth $3.67 at 3x EBITDA. He says the company is growing better than people give them credit for and many investors gloss over the name due to the poor Nextel deal. Cooperman also pointed out past success by Softbank with telecom in Japan and Vodafone, noting vast improvement post-involvement of Softbank. In 12-18 months, he thinks S is worth $6.50.

3. Tetragon Financial (TFG): He labeled this company as "too complicated" and blasted management at the beginning of his pitch, but then still managed to make the case for the company. He said that you "go to bed with dogs, you wake up with fleas" and pointed out that the company hasn't had a conference call for 5 years so it's tough to get questions answered.

We're pretty sure he said his cost basis is around 2-3 in the name. He pointed out the company's 20% return on equity, a book value of between 14-25 and the fact that a large portion of the company's market cap is in cash and it trades at a big discount to book. It's also worthwhile that Cooperman has also held a longstanding position in similar company KKR Financial (KFN).

Perhaps the most telling statement from Cooperman was that he's sitting on a lot of cash now because there's a lot that can happen in the coming months.

His first play was to not own 10 year government bonds in any currency. We've highlighted how Lee Cooperman strongly dislikes treasuries at this juncture and Carlson echoed those sentiments. He said that many people are overlooking the fact that rates could jump higher. While the Fed Funds rate will remain low, the 10 year doesn't necessarily follow that. Carlson also does not believe we go the way of Japan.

He says that treasuries are not a good risk/reward and event co-founder Shad Rowe quoted Jim Grant, saying that these bonds offer return-free risk. Carlson, however, said that you can't short treasuries now because the Fed can buy longer than you can remain solvent. He dislikes corporate bonds as well and says to keep that exposure to a minimum for diversification.

Carlson's 2nd Pick: PostNL

His second idea was probably the most 'true hedgie' play at the conference. What we mean by that is that it's a cheap option on risk arbitrage but also a fundamental investment. His pick was PostNL (AMS:PNL or PNYLL via ADR). The Dutch delivery company represents the "perfect storm" he says.

PostNL owns almost a 30% stake in TNT Express, which is set to be taken over by UPS (pending deal closure). Carlson argues there's a range of outcomes which is why it's compelling.

Scenario 1: The deal does not close and downside is 20%.
Scenario 2: The deal does not close but significant upside remains if the market values PNL's TNT Express stake
Scenario 3: The deal closes, PNL gets 1.5bn and the stock doubles

Carlson thinks the deal closes, but points out this is a risky bet.

On the fundamental side of the investment, he points out how operating margins have tanked from 14% down to 7% and they're modeling an improvement up to 8-9%. He points out how mail volumes in the Netherlands have dropped 10% per year and so that's a risk. Carlson thinks that it's close to the trough, but that Europe doesn't improve for 4-5 years.

In order to compete, the company either has to raise prices otherwise they'll shut down. He thinks it's also a potential leveraged buyout (LBO) candidate and that "this will be a volatile trade." Right now there's a big percentage of owners that are event-driven or risk arbitrage funds. If the deal falls through, there will be an ownership shift.

Carlson is focused on the end-game here and sees this as a 6 month - 1 year holding. He says you could buy 1/2 a position now and buy another 1/2 to "double down" if the chance presents itself at lower levels. We also took notice that Lee Cooperman (also on the panel) was taking notes on this pitch.

Pickens started his presentation talking about how the oil industry has changed over the past 10 years and how he thinks we can rebuild the economy off of cheap energy. In politics, he thinks Romney will win the election and says he has the first true US energy plan (though it's not complete and he'd like to see more natural gas used).

Pickens on Natural Gas

One of the bolder calls of the conference was made when T. Boone argued that natural gas prices would rise to $4.50 or $5 in the next year and could see $6 by 2015.

Pickens' Stock Picks

At GIBI, Pickens recommended two stocks. His first pick was National Oilwell Varco (NOV). It currently trades at just under $74 and he thinks it will see $100. He points to the company's huge shale opportunity for development and that there's still support for oil domestically and internationally.

His second pick was Pioneer Natural Resources (PXD), which he likes due to their great assets, pointing to 900,000 acres (of which he specifically mentioned the Permian basin assets). He says they'll be drilling for a while. The stock currently trades at just under $106 and he thinks it sees $150.

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Mick McGuire of Marcato Capital Management. He focuses on companies with market caps between $1-5 billion and employs activism where needed. He previously worked for Bill Ackman's Pershing Square. He pitched 3 ideas:

Long Cincinnati Bell (CBB)

Trading around an EV of 3.8bn, McGuire highlights that Cincinnati Bell is actually two companies in one: a legacy telecom company that generates cashflow but is declining and a data center/colocation business that is seeing 20% growth year over year.

Currently, CBB uses free cash flow to fund the data center growth. The stock is disliked by both growth and yield investors so the solution is to split the businesses.

The company will be spinning off its data center business as a REIT. Then the telco business can de-lever, pay a dividend and repurchase shares. McGuire is looking for a December or Q1 initial public offering (IPO). His sum of the parts yields a target price of $8.30.

This is an oldie but goodie as McGuire's previous employer, Pershing Square, had also owned Corrections Corp in the past. Marcato Capital Management says this is a name with a hard catalyst in the form of a REIT conversion.

The fundamental thesis on this name is that there's an "acute overcrowding problem in public prisons." McGuire argues that private prisons like CXW are a better option and there's significant barriers to entry here. The average cost per bed is 80k+ for government versus 55-65k for private. He also points to incremental margins being high.

Given the theme of REIT conversions this year in the markets, McGuire highlighted why it's beneficial to be a REIT: free cashflow by tax savings, superior credit rating, and cap rates. He says CXW trading at 15x AFFO would be worth $50/share.

NCR Corp (NCR)

McGuire's last idea is National Cash Register (NCR). They supply ATM's and point of sale (POS) devices. They have an incumbent position in the market and ATM's are their primary focus. He likes that they have high barriers to entry due to the frequent servicing requirements of ATMs (Diebold is their main US competitor).

He pointed out that emerging markets are driving growth and that there are often regional duopolies in the segment. In North America, we're in the midst of a big upgrade cycle for money center banks but it's just begun for smaller banks. The thought here is that banks pay up for advanced ATMs to reduce in-branch spending.

McGuire also points out that NCR is #2 in self-checkout point of sale, behind IBM. This has been a big trend popping up around the country.

He points out that the growth is obscured by the company's underfunded pension. The company issued $600mm in debt at 5% to help fund it. Marcato Capital Management originally built their position in the spring. He likes the 11% free cash flow yield and sees 35% upside. He sees $3.80 in EPS in 2015.

She started by focusing on Westwood's outlook that in the next 1-3 years we'll see slow below potential GDP growth. She disagrees with Lee Cooperman a little bit. She's more positive on corporate earnings and likes playing high quality names globally.

Byrne thinks we'll see rising but tame inflation and she likes to play companies that have yields higher than the S&P 500. She said that the "ultimate risk instrument is stocks" so you need some insulation/protection in the form of a dividend.

She likes companies that grow dividends and put up a chart of the likes of Microsoft (MSFT), Exxon Mobil (XOM), Honeywell (HON), Johnson & Johnson (JNJ), General Electric (GE), and Automatic Data Processing (ADP). She points out that all of these have equity yielding more than their bonds.

Byrne feels the S&P is "somewhat undervalued" by 10-12% and she wants to beat inflation with dividend yields. She said to look at emerging markets, in particular Indonesia.

Byrne's Stock Picks

And speaking of Indonesia, she had a stock pick from that country via shares of Media Nusantara (PTMEY via ADR), an advertising company there. She points out that they're growing advertising by 22% a year and you can play it in the domestic market or via ADR. The company has a 2% dividend and a mid-teens multiple.

Byrne also pitched a domestic small-cap play via Kapstone Paper (KS). It trades at 5x EV/EBITDA, has a 10% free cash flow yield and the company's price increases for their products are holding.

His presentation centered around avoiding major banks as investments. He argued that they've gotten so big and have strayed from what true banks used to be that you no longer really know what you're investing in.

Rose rattled off a list of reasons why, including capital structure, subsidy (banks enjoy low regulated interest rates), and structural mismatch among others. He feels that banks should compete without subsidy and that the deposit guarantee should be axed.

He wondered why analysts use book value for banks when they don't underestimate assets and they don't overestimate liabilities. He also feels banks are still over-levered and taking too much risk (due to management incentives).

Rose also touched on how the regulatory/political environment for financials peaked in 2008. He compared big bank stocks to Paris Hilton, saying both are famous for being famous.

Wednesday, October 31, 2012

Keith Meister's hedge fund Corvex Management has filed a 13D on ADT (ADT) and has disclosed a 5.02% ownership stake with 11,541,021 shares. This filing is also made jointly with Soros Fund Management, who have disclosed a 0.25% stake in ADT with 575,000 shares. The filing was made due to portfolio activity on October 24th.

Corvex's Activist Stake

Keith Meister founded Corvex after working under Carl Icahn for years, so it should come as no surprise that he employs a similar activist strategy. In the 13D, Corvex notes that they've already had discussions with management about the company's business and strategies and intend to have further discussions.

It's also worth pointing out that the footnotes reveal that Corvex only owns 1,844,021 ADT common shares. The rest of their stake is broken down in a series of options trades:

- Own call options representing 7,307,000 shares with strike price of $25 and an expiration of 09/30/2013

- Own calls representing 1,065,000 shares with $25 strike and expiration of 10/28/2013

- Own calls representing 750,000 shares with exercise of $42 and expiration of 1/19/2013

- Sold OTC "European-style put options referencing an aggregate of 8,372,000 shares at an exercise price of $25.00 per share, of which 7,307,000 expire on September 30, 2013 and 1,065,000 expire on October 28, 2013 or, in each case, the date on which the corresponding American-style call option described above is exercised."

- Sold open market American-style put options referencing an aggregate of 750,000 shares with an exercise of $36.00 and expiration of January 19, 2013.

Soros Fund Management has also entered into an agreement that allows Corvex to vote Soros' shares as they see fit.

ADT Spun-Out From Tyco

The first thing you need to know is that ADT, a home security business, recently became independently traded as part of the Tyco spin-off.

It appears as though Corvex did not receive any shares in the spin-off and instead purchased the when-issued shares from September 17th through 28th at various dates and also made open market purchases and option purchases post-spin throughout the month of October.

Corvex's Thesis & Presentation on ADT

Meister has laid out an entire presentation on how ADT can improve its business and create more shareholder value. This presentation was originally given at the Excellence in Investing: San Francisco event on October 24th.

The entire presentation is embedded below, but in summary, he basically believes that ADT is a unique franchise asset and has a defensive & predictable business model with consistent cash flows. He points to the company's unappreciated secular growth tailwinds and notes its mispricing post-spin (poor capital structure, no public comps, etc).

The crux of his thesis, though, centers around balance sheet optionality. Meister feels that ADT should increase leverage and improve capital allocation. He calls ADT a "equity shrink story waiting to happen."

Tiger Management's Julian Robertson seems to be making his yearly media rounds. Last week we highlighted his thoughts on what stocks he likes now. Today we're posting up his interview with BloombergTV where he talks about why hedge funds are underperforming.

On Why Hedge Funds Have Had a Challenging 2012

The Tiger Management founder said that, “They are having a challenge because a lot of people in the hedge fund business have become so disenchanted with the economies of the world. Europe is a mess and we see the fiscal problems of the United States. Hedge funds -there are a lot of them that really are disaster funds now. In other words, they are really only going to be profitable in the event of a big disaster.”

On Hedge Funds That Are Underperforming

Robertson argues that, “I think right now they are really scared. They have made a mistake. They are now unhedged because they are so scared. They really will succeed only if we have rather disastrous period…We have to assume that a black swan event is very unlikely…They have gotten so bearish that some of them that that is what has happened. They will not get out of it without a black swan type event.

This is still the best place to run money. One reason the hedge funds are not doing as well as they used to is the competition is more hedge funds. And that the competition is so much better than any other form of competition.”

Here's something you don't necessarily see everyday: a hedge fund taking a stake in another hedge fund. Crispin Odey's UK-based hedge fund firm Odey Asset Management has purchased 5.1% of the voting rights of peer Man Group (LON: EMG) in a disclosure on October 25th.

The breakdown of their position is 3.03% ordinary shares and 2.12% contract for difference (we've previously explained contract for difference here). This move makes Odey the second largest institutional shareholder of Man Group. It will be interesting to follow the situation to see if anything develops further.

Mick McGuire's hedge fund firm Marcato Capital Management has filed a 13G with the SEC pertaining to shares of Cincinnati Bell (CBB). Per the filing, they have revealed a brand new position in CBB representing 7.19% ownership in the company with 14,192,985 shares.

The 13G was required due to portfolio activity on October 25th that brought them above the 5% ownership threshold where it's necessary for them to publicly disclose their stake.

This makes Marcato one of the largest institutional shareholders of CBB, along with Lonestar Capital Management. An analyst at Lonestar pitched CBB in the Value Investing Congress investment idea contest and was a finalist.

It's also worth pointing out that CBB was one Ted Weschler's holdings at his old hedge fund that is now closed. Weschler of course has been a portfolio manager at Warren Buffett's Berkshire Hathaway for a while now. However, Berkshire has not invested in CBB.

Per Google Finance, Cincinnati Bell "is a full-service provider of data and voice communications services over wireline and wireless networks, a full-service provider of data center colocation and related managed services, and a reseller of information technology (IT) and telephony equipment. The Company provides telecommunications service to businesses and consumers in the Greater Cincinnati and Dayton areas on its owned wireline and wireless networks. The Company also provides business customers with outsourced data center colocation operations and related managed services in data center facilities."

Roberto Mignone's hedge fund firm Bridger Management recently filed a 13G with the SEC regarding Wright Medical Group (WMGI). Per the filing, they have disclosed a 5.1% ownership stake in WMGI with 2,000,000 shares.

This marks an increase of 40% in their position size since the end of the second quarter. Do note that this filing is made due to portfolio activity on August 22nd, so the filing seems to be a bit delayed.

Bridger is known for its focus on health-related plays and this stake certainly fits that mold.

Per Google Finance, Wright Medical Group is "a global orthopaedic medical device company specializing in the design, manufacture and marketing of devices and biologic products for extremity, hip and knee repair and reconstruction. The Company is provider of surgical solutions for the foot and ankle market. It offers products in four primary market sectors: extremity reconstruction, biologics, knee reconstruction and hip reconstruction."

John Griffin's hedge fund firm Blue Ridge Capital filed a 13G with the SEC regarding shares of Workday (WDAY). Per the filing, Blue Ridge has revealed a 6.87% ownership stake in WDAY with 1,798,000 shares.

This is a brand new position for the hedge fund and the company just began trading on October 15th. There's no way to know for sure if they participated in the IPO, but the reason that is important to point out is because shares spiked 70% from the IPO price so there's obviously a big difference in cost basis depending on where they purchased shares.

Due to portfolio activity on October 18th, Blue Ridge crossed the threshold that requires public disclosure of their stake. Workday competes in the software as a service (SaaS) segment.

Per Google Finance, Workday is "a provider of enterprise cloud-based applications for human capital management (HCM), payroll, financial management, time tracking, procurement and employee expense management. It is focused on the consumer Internet experience and cloud delivery model. Its applications are designed for global enterprises to manage complex and dynamic operating environments."

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